WEBVTT NOTE session-08 1 00:00:00.000 --> 00:00:13.135 Granite Harbor signs one contract to build, install, and maintain a storage system for Fairmont Health. How much revenue does Granite Harbor report, and when? 2 00:00:13.135 --> 00:00:21.033 Session 8 follows that one contract from the signed agreement to the balances left at year end. 3 00:00:21.033 --> 00:00:36.827 Revenue is hard because one contract can hold several promises. The seller must decide what it promised, how much of the price belongs to each promise, and when each promise transfers to the customer. 4 00:00:36.827 --> 00:00:42.433 An invoice or a cash receipt answers none of those questions by itself. 5 00:00:42.433 --> 00:00:59.255 Session 8 covers six objectives, 2.3a through 2.3f. You decide whether an arrangement is a contract with a customer under ASC 606. You find its performance obligations and its transaction price. 6 00:00:59.255 --> 00:01:08.100 You allocate that price, decide when each part becomes revenue, and classify the balances that remain. 7 00:01:08.100 --> 00:01:25.938 Keep one idea in view for the whole class. Revenue follows the promises the seller performs. Identify the promises, allocate the transaction price, and follow each promise until the customer obtains control. 8 00:01:25.938 --> 00:01:33.867 Invoices and cash are facts to check, but neither one sets the revenue amount or its timing. 9 00:01:33.867 --> 00:01:52.531 The class has four parts. Part 1 confirms that Granite Harbor has a contract. Part 2 identifies its performance obligations and allocates the price. Part 3 decides when revenue is recognized and which balances remain. 10 00:01:52.531 --> 00:01:57.433 The last part covers Exam 1 logistics and your questions. 11 00:01:57.433 --> 00:02:11.098 Here are the five steps in order. Identify the contract. Then identify the distinct performance obligations. Third, estimate the transaction price and apply the constraint. 12 00:02:11.098 --> 00:02:27.624 Fourth, allocate that price, normally by relative standalone selling prices. Last, recognize each allocated amount when control of that obligation transfers. Each step uses the answer from the step before it. 13 00:02:27.624 --> 00:02:33.900 Specialized contracts under other guidance are outside the scope of this class. 14 00:02:33.900 --> 00:02:41.867 Step 1 asks one question. Does an enforceable arrangement meet all five contract criteria? 15 00:02:41.867 --> 00:02:56.591 Work Step 1 in three moves. Locate the agreement with the customer and the enforceable rights it creates. Evaluate the arrangement against all five contract criteria. Then decide. 16 00:02:56.591 --> 00:03:08.600 If every criterion is met, proceed through the model. If any criterion fails, stop, and record a deposit liability for any cash the customer paid. 17 00:03:08.600 --> 00:03:25.093 The five criteria come from ASC 606-10-25-1. Both parties have approved the arrangement and are committed to perform. Each party's rights can be identified. The payment terms can be identified. 18 00:03:25.093 --> 00:03:42.868 The arrangement has commercial substance. And collection of substantially all the consideration the seller expects is probable, based on the customer's ability and intention to pay. Keep two ideas apart here. 19 00:03:42.868 --> 00:03:54.233 An expected price concession lowers the amount the seller expects. Doubt that the customer will pay an amount it owes is credit risk. 20 00:03:54.233 --> 00:04:09.274 If the arrangement fails Step 1, ASC 606 does not treat it as a contract with a customer yet. With no cash received, record nothing and reassess when the facts change. 21 00:04:09.274 --> 00:04:22.423 With cash received, debit Cash 5,000 dollars and credit Customer Deposit Liability 5,000 dollars. A deposit liability is not a contract liability. 22 00:04:22.423 --> 00:04:35.752 The company keeps it until it refunds the cash or ASC 606-10-25-7 allows revenue. If the arrangement later qualifies, the company applies the model. 23 00:04:35.752 --> 00:04:42.867 Any deposit for goods or services still owed then becomes a contract liability. 24 00:04:42.867 --> 00:04:52.331 Here is the Granite Harbor agreement. Both parties signed on December 2, and cancellation requires an uncured breach. 25 00:04:52.331 --> 00:05:09.157 Granite Harbor will build, deliver, and install an automated specimen-storage system in Fairmont Health's new laboratory by January 1. It will then provide quarterly calibration and maintenance for 36 months. 26 00:05:09.157 --> 00:05:22.423 Fairmont pays 40,000 dollars at signing, 60,000 dollars at acceptance, and 20,000 dollars after the first maintenance year. Timely installation adds 12,000 dollars. 27 00:05:22.423 --> 00:05:34.800 Fairmont paid the deposit, has an approved credit line, and paid two earlier contracts on time. Test all five criteria. Pause the video while you decide. 28 00:05:44.800 --> 00:05:56.280 All five criteria are met, and each color ties one criterion to its fact. The signatures and the breach-only cancellation show approval and commitment. 29 00:05:56.280 --> 00:06:10.953 The build, installation, and maintenance terms identify each party's rights. The payment schedule identifies the payment terms. New cash and new costs give the arrangement commercial substance. 30 00:06:10.953 --> 00:06:20.000 The paid deposit, the credit line, and the payment history make collection probable. Granite Harbor proceeds to Step 2. 31 00:06:20.000 --> 00:06:25.967 Step 2 asks which promised goods or services are distinct. 32 00:06:25.967 --> 00:06:43.287 ASC 606-10-25-19 sets two tests, and a promise must pass both. Test 1 asks whether the item is capable of being distinct. Can the customer benefit from it alone or with a resource that is readily available? 33 00:06:43.287 --> 00:06:54.721 Lumber passes, because another builder can use it. Test 2 asks whether the promise is separate from the other promises in this contract. 34 00:06:54.721 --> 00:07:07.922 The same lumber fails when a contractor combines it with labor into a finished house. If both answers are yes, the promise is its own performance obligation. 35 00:07:07.922 --> 00:07:14.900 If either answer is no, combine it with related promises and test the bundle again. 36 00:07:14.900 --> 00:07:29.733 First question. Tires and batteries are sold separately and work with cars customers already own. Which added fact makes those components inputs to one combined performance obligation? 37 00:07:29.733 --> 00:07:46.824 A, an automaker integrates them with other components to deliver a finished vehicle. B, a parts supplier transfers each replacement part separately. C, the customer can resell each part for more than scrap value. 38 00:07:46.824 --> 00:07:52.467 D, the contract lists a separate price for each component. Choose one. 39 00:08:00.467 --> 00:08:07.346 The answer is A. The tires and batteries can provide benefit on their own, so Test 1 passes. 40 00:08:07.346 --> 00:08:22.675 The automaker integrates them with other components into the finished vehicle promised to the customer, so Test 2 fails and the vehicle is one performance obligation. Choice B describes separate transfers. 41 00:08:22.675 --> 00:08:36.733 Choice C supports Test 1 because resale above scrap shows economic benefit. Choice D is not decisive, because contract prices do not determine whether promises are separately identifiable. 42 00:08:36.733 --> 00:08:49.371 The series rule applies to repeated services, under ASC 606-10-25-14 and 25-15. Each service must be distinct and substantially the same. 43 00:08:49.371 --> 00:09:07.266 Each service must also qualify for over-time recognition and use the same measure of progress. When both conditions hold, the company accounts for the whole series as one performance obligation. 44 00:09:07.266 --> 00:09:17.967 The rule changes the unit of account. It does not make a service distinct when that service fails the distinct test. 45 00:09:17.967 --> 00:09:34.515 List every possible promise before you classify any of them. The service schedule names three promises. Granite Harbor builds and delivers the storage system, installs it, and maintains it quarterly for 36 months. 46 00:09:34.515 --> 00:09:49.509 Four added facts matter. The system works after ordinary installation. Other vendors routinely install and service similar systems. The installation does not significantly modify the equipment. 47 00:09:49.509 --> 00:09:57.900 And before maintenance begins, Granite Harbor sets up Fairmont's account in its own internal service system. 48 00:09:57.900 --> 00:10:19.047 Now classify four items, the storage system, installation, maintenance, and account setup. For each one, choose its own performance obligation, part of a combined obligation, or not a promised transfer. Label any series. 49 00:10:19.047 --> 00:10:22.700 Pause the video if you need more time. 50 00:10:34.700 --> 00:10:45.906 Granite Harbor has three performance obligations. The storage system is one, because it works with ordinary installation and is not modified or integrated. 51 00:10:45.906 --> 00:10:56.606 Installation is another, because other vendors can do it and it does not produce a combined output. Maintenance also passes both distinct questions. 52 00:10:56.606 --> 00:11:06.872 Fairmont benefits from each maintenance period with the installed system. Maintenance does not modify or integrate the system or installation. 53 00:11:06.872 --> 00:11:19.451 The substantially same service periods transfer evenly over 36 months, so the series rule accounts for them as one performance obligation. Account setup is not an obligation. 54 00:11:19.451 --> 00:11:23.933 It is an internal activity that transfers nothing to Fairmont. 55 00:11:23.933 --> 00:11:38.306 Compare two sales involving tires and batteries. In both, each component passes Test 1 because the customer can use it with a car it already owns and the parts are sold separately. 56 00:11:38.306 --> 00:11:51.800 In a replacement-parts sale, the supplier transfers each part separately and does not produce a combined output. Test 2 passes, so there are two performance obligations. 57 00:11:51.800 --> 00:12:08.887 In a finished-vehicle sale, the automaker integrates the components into the promised vehicle. Test 2 fails, so the vehicle is one combined performance obligation. Test 1 asks whether each part can provide benefit. 58 00:12:08.887 --> 00:12:12.400 Test 2 asks what output the seller promises. 59 00:12:12.400 --> 00:12:20.333 Step 3 asks how much consideration the company expects to receive for the promised goods and services. 60 00:12:20.333 --> 00:12:32.058 The transaction price is the consideration expected for everything promised in the contract. Step 3 produces one total, not a price for each obligation. 61 00:12:32.058 --> 00:12:48.102 That total includes fixed and variable consideration, subject to the constraint. It also reflects any noncash consideration, any consideration payable to the customer, and any significant financing component. 62 00:12:48.102 --> 00:12:51.033 Step 4 then divides that single total. 63 00:12:51.033 --> 00:13:09.030 ASC 606-10-32-8 allows two methods to estimate variable consideration. The expected value is the sum of probability-weighted amounts, and it often fits a range of outcomes or a group of similar contracts. 64 00:13:09.030 --> 00:13:18.998 The most likely amount is the single most likely outcome, and it often fits a contract with two possible amounts. 65 00:13:18.998 --> 00:13:28.967 Two outcomes point toward the most likely amount, but the test is which method better predicts the consideration. 66 00:13:28.967 --> 00:13:48.091 Second question. A contract pays a 12,000 dollar deadline bonus or nothing. Which method would usually better predict the bonus for one contract? A, the most likely amount, because there are two possible amounts. 67 00:13:48.091 --> 00:14:00.900 B, expected value, because every variable amount needs probability weights. C, relative standalone selling price. D, cost-to-cost. Choose one. 68 00:14:08.900 --> 00:14:22.298 The answer is A. With an outcome of 12,000 dollars or zero, one selected amount usually predicts better than a weighted average that can never occur. 69 00:14:22.298 --> 00:14:39.833 B is usually a weaker fit, since expected value suits a range of outcomes. C belongs to Step 4, after the price is set. D measures progress on an over-time obligation, which is a Step 5 question. 70 00:14:39.833 --> 00:14:54.986 Keep two questions apart. The first asks what amount is expected. Choose the method and calculate the estimate. The second asks how much of that estimate can be included. 71 00:14:54.986 --> 00:15:11.833 Under ASC 606-10-32-11, include variable consideration only to the extent that a significant revenue reversal is probable not to occur. Weigh both the likelihood and the size of a reversal. 72 00:15:11.833 --> 00:15:24.133 Outside control, limited experience, or a long wait for the result increases the risk. Reassess any excluded amount when the facts change. 73 00:15:24.133 --> 00:15:39.406 Back to Granite Harbor. The fixed price is 120,000 dollars. The deadline bonus is 12,000 dollars or zero. Granite Harbor finished 39 of 40 comparable installations on time. 74 00:15:39.406 --> 00:15:58.407 The site has no unusual condition, and Granite Harbor controls manufacturing, delivery, and installation scheduling. Choose the method, estimate the bonus, apply the constraint, and calculate the transaction price. 75 00:15:58.407 --> 00:16:05.333 Stop the video here and write down each answer with the fact that supports it. 76 00:16:17.333 --> 00:16:31.054 Start with the estimate. The bonus is 12,000 dollars or zero, so use the most likely amount, which is 12,000 dollars. Next, apply the constraint. 77 00:16:31.054 --> 00:16:47.708 The 39 of 40 record, the ordinary site, and Granite Harbor's control of the schedule make a significant reversal unlikely, so include the full 12,000 dollars. Third, calculate. 78 00:16:47.708 --> 00:16:58.400 120,000 dollars of fixed consideration plus the 12,000 dollar bonus gives a transaction price of 132,000 dollars. 79 00:16:58.400 --> 00:17:14.175 Third question. Assume 12,000 dollars is still the most likely amount, and each choice replaces only the constraint facts. Which one creates the greatest risk of a revenue reversal? 80 00:17:14.175 --> 00:17:28.903 A, a new permitting authority controls building access, and Granite Harbor has no experience with it. B, Granite Harbor met 39 of 40 deadlines and controls its schedule. 81 00:17:28.903 --> 00:17:39.100 C, the customer pays the fixed price in three installments. D, the invoice labels the bonus as equipment. Choose one. 82 00:17:47.100 --> 00:18:02.543 The answer is A. An outside authority controls the result, and Granite Harbor has no relevant experience, so the bonus is constrained to zero. B supports including the estimate, as in the base case. 83 00:18:02.543 --> 00:18:15.100 C is irrelevant, because payment timing tells you nothing about earning the bonus. D is irrelevant too, because an invoice label does not change the uncertainty. 84 00:18:15.100 --> 00:18:30.130 Payment timing can hide a financing component, as described in ASC 606-10-32-15. Compare the payment date with the transfer date, and identify who receives the financing benefit. 85 00:18:30.130 --> 00:18:39.756 Then consider the price difference, the time between the two dates, and market interest rates. Here is an example. 86 00:18:39.756 --> 00:18:57.826 Equipment transfers today with a cash selling price of 100,000 dollars, and the customer pays 121,000 dollars in two years. Revenue today is 100,000 dollars, and the other 21,000 dollars is interest over two years. 87 00:18:57.826 --> 00:19:16.233 Two exceptions apply. A payment held back to protect against nonperformance is not financing. And under ASC 606-10-32-18, a company may skip the adjustment when it expects one year or less between transfer and payment. 88 00:19:16.233 --> 00:19:24.233 Step 4 asks how much of the one transaction price belongs to each performance obligation. 89 00:19:24.233 --> 00:19:37.240 The two inputs come from earlier steps. Step 2 produced the performance obligations, three of them in this picture. Step 3 produced one transaction price for the whole contract. 90 00:19:37.240 --> 00:19:52.967 Step 4 splits that price by relative standalone selling price. A standalone selling price is the price of a good or service when it is sold separately. The allocated shares always add back to the transaction price. 91 00:19:52.967 --> 00:20:01.555 A real case shows the stakes. Xerox sold copiers under leases that bundled equipment, service, and financing. 92 00:20:01.555 --> 00:20:16.211 The SEC alleged that Xerox assigned more of each bundle to the equipment, which it recognized at the start of the lease. Less went to service and financing, which Xerox recognized later. 93 00:20:16.211 --> 00:20:29.054 According to the 2002 SEC complaint, the method pulled forward 2.2 billion dollars of equipment revenue and 301 million dollars of earnings from 1997 through 2000. 94 00:20:29.054 --> 00:20:36.067 The case predates ASC 606, but it shows how the allocation moves revenue between periods. 95 00:20:36.067 --> 00:20:54.071 Here is the default formula, from ASC 606-10-32-31. First, divide the obligation's standalone selling price by the total of all standalone selling prices. Then multiply that ratio by the transaction price. 96 00:20:54.071 --> 00:21:01.273 The default method keeps invoice labels from deciding what each obligation earned. 97 00:21:01.273 --> 00:21:14.183 Granite Harbor's standalone prices are 100,000 dollars for the storage system, 20,000 dollars for installation, and 30,000 dollars for maintenance. 98 00:21:14.183 --> 00:21:21.033 No case fact supports an exception, so Granite Harbor uses the default method. 99 00:21:21.033 --> 00:21:37.078 Now do the allocation. The transaction price is 132,000 dollars. The standalone selling prices are 100,000 dollars for the storage system, 20,000 dollars for installation, and 30,000 dollars for maintenance. 100 00:21:37.078 --> 00:21:46.767 Show each ratio, allocate the price, and check that the total is 132,000 dollars. Work it on paper before the answer appears. 101 00:21:58.767 --> 00:22:24.025 The standalone prices total 150,000 dollars. The storage system is 100,000 over 150,000, or two thirds, so it receives 88,000 dollars. Installation is 20,000 over 150,000, 13.3333 percent, so it receives 17,600 dollars. 102 00:22:24.025 --> 00:22:47.900 Maintenance is 30,000 over 150,000, 20 percent, so it receives 26,400 dollars. The three allocations add to 132,000 dollars. Allocation sets only the amounts. Step 5 decides when each amount becomes revenue. 103 00:22:47.900 --> 00:22:53.267 Step 5 asks when each allocated amount becomes revenue. 104 00:22:53.267 --> 00:23:07.831 Each performance obligation takes one of two branches. Test the over-time criteria first. If any criterion applies, recognize the allocated amount as the work proceeds, using a measure of progress. 105 00:23:07.831 --> 00:23:20.400 If none applies, recognize the amount once, on the date the customer obtains control. A progress measure cannot move a point-in-time obligation onto the over-time branch. 106 00:23:20.400 --> 00:23:35.302 ASC 606-10-25-27 lists three criteria, and meeting any one is enough. Under the first, the customer receives and uses the benefit as the work occurs, such as weekly advice. 107 00:23:35.302 --> 00:23:45.786 Under the second, the work creates or improves an asset the customer controls, such as a building on the customer's land. 108 00:23:45.786 --> 00:24:04.500 Third, the asset has no alternative use to the seller, and the seller has a right to payment for work completed to date. Unique equipment that cannot be redirected, with payment due for completed work, is an example. 109 00:24:04.500 --> 00:24:21.935 Cost-to-cost is an input method for measuring progress. Use it only after the obligation qualifies for over-time recognition. Progress to date equals costs incurred to date divided by estimated total qualifying costs. 110 00:24:21.935 --> 00:24:38.567 Cumulative revenue equals progress to date times the allocated transaction price. GAAP requires a progress measure but does not require cost-to-cost. Use it when the costs match the transfer to the customer. 111 00:24:38.567 --> 00:24:46.200 Leave out a cost that does not match, such as a significant material that is not yet installed. 112 00:24:46.200 --> 00:24:58.215 Keweenaw Systems enhances software the customer already controls. The customer-controlled-asset criterion applies, so Keweenaw uses over-time recognition. 113 00:24:58.215 --> 00:25:14.209 Keweenaw has incurred 64,000 dollars of an estimated 160,000 dollars of qualifying cost. Progress is 40 percent. Forty percent of the 240,000 dollar allocated price is 96,000 dollars of cumulative revenue. 114 00:25:14.209 --> 00:25:21.933 The costs work as a measure because the labor matches the enhancements transferred to the customer. 115 00:25:21.933 --> 00:25:35.998 Use the point-in-time branch only when no over-time criterion applies. Recognize the allocated amount once, on the date the customer obtains control. Several facts can indicate control. 116 00:25:35.998 --> 00:25:52.343 The seller has a present right to payment. The customer has legal title and physical possession. The customer has the significant risks and rewards, and the customer has accepted the asset. Weigh the facts together. 117 00:25:52.343 --> 00:25:56.600 Shipment or an invoice alone does not establish control. 118 00:25:56.600 --> 00:26:12.826 Fourth question. Each choice replaces one fact about a consulting project. Which one meets an over-time criterion? A, the customer receives weekly advice and can use it immediately. 119 00:26:12.826 --> 00:26:30.487 B, the consultant has incurred 60 percent of expected labor cost. C, the customer gets no benefit until a standard report arrives, the report can be redirected, and nothing is owed on cancellation. 120 00:26:30.487 --> 00:26:34.700 D, the consultant bills each month. Choose one. 121 00:26:42.700 --> 00:26:57.699 The answer is A. The customer uses the advice as it arrives, so the first criterion applies. B is not enough, because cost measures progress only after an over-time criterion applies. 122 00:26:57.699 --> 00:27:13.600 C points to a single point in time, because no benefit transfers during the work and there is no right to payment. D is not enough, because monthly billing alone does not show value transferred. 123 00:27:13.600 --> 00:27:27.219 Now finish Granite Harbor. The allocations are 88,000 dollars for the storage system, 17,600 dollars for installation, and 26,400 dollars for maintenance. 124 00:27:27.219 --> 00:27:39.866 On January 1, 2025, Fairmont accepts the system and installation, takes title and possession, assumes the risk of loss, and can use the system. 125 00:27:39.866 --> 00:27:58.792 From January 1, 2025 through December 31, 2027, Granite Harbor stands ready to maintain it, and Fairmont receives equal coverage each month. Classify each obligation and calculate revenue through December 31, 2025. 126 00:27:58.792 --> 00:28:01.533 Pause the video while you work. 127 00:28:13.533 --> 00:28:29.961 Fairmont obtains control of the storage system and installation on January 1. Granite Harbor recognizes both at that point in time, 88,000 dollars and 17,600 dollars. 128 00:28:29.961 --> 00:28:47.973 Maintenance transfers evenly across 36 months, so it takes the over-time branch. Twelve of those months fall in 2025, so revenue is 26,400 dollars times 12 over 36, or 8,800 dollars. 129 00:28:47.973 --> 00:28:51.733 Year 1 revenue totals 114,400 dollars. 130 00:28:51.733 --> 00:29:06.089 Revenue, billing, and cash each run on their own schedule, and each gap produces a balance. A receivable is unconditional billings less cash collected. 131 00:29:06.089 --> 00:29:17.783 A contract asset arises when recognized revenue exceeds billings and the right to the unbilled amount is still conditional. 132 00:29:17.783 --> 00:29:34.611 A contract liability arises when billings or cash exceed recognized revenue and performance is still owed. Under ASC 606-10-45-1, present an unconditional receivable separately. 133 00:29:34.611 --> 00:29:40.600 Do not net it against a contract asset or a contract liability. 134 00:29:40.600 --> 00:30:02.182 Last question. At December 31, 2025, Granite Harbor has recognized 114,400 dollars of revenue, issued 120,000 dollars of unconditional billings, and collected 90,000 dollars. What balances remain? 135 00:30:02.182 --> 00:30:22.773 A, a receivable of 30,000 dollars and a contract liability of 5,600 dollars. B, a receivable of 30,000 dollars and a contract asset of 24,400 dollars. C, one receivable of 24,400 dollars. 136 00:30:22.773 --> 00:30:29.600 D, cash of 90,000 dollars and no contract balance. Choose one. 137 00:30:37.600 --> 00:30:50.329 The answer is A. Compare each pair separately. The receivable is 120,000 dollars billed less 90,000 dollars collected, or 30,000 dollars. 138 00:30:50.329 --> 00:31:08.261 The contract liability is 120,000 dollars billed less 114,400 dollars recognized, or 5,600 dollars. B has the direction wrong, since a contract asset arises only when performance leads billing. 139 00:31:08.261 --> 00:31:18.667 C nets two balances that must be presented separately. D ignores both the unpaid billing and the excess billing. 140 00:31:18.667 --> 00:31:34.041 Exam 1 is Tuesday, September 29. It has 33 multiple-choice questions, runs 80 minutes, and is worth 100 points. It covers Units 1 and 2, which are Chapters 1 through 8. 141 00:31:34.041 --> 00:31:48.867 You will take it in D2L using Respondus LockDown Browser. The question order is fixed, so related parts stay with their data, and the answer choices are shuffled. 142 00:31:48.867 --> 00:32:03.910 Bring five things. One handwritten 3 by 5 note card, and you may use both sides. A charged laptop and its charger. A basic four-function calculator, not a phone or a smart watch. 143 00:32:03.910 --> 00:32:17.601 Your Michigan State University student identification. Paper and a pencil for scratch work. Your instructor checks each note card before anyone opens the browser. 144 00:32:17.601 --> 00:32:30.700 No other notes, textbooks, course materials, AI tools, or internet use is allowed. If you have not opened Respondus since week one, open it before Tuesday. 145 00:32:30.700 --> 00:32:40.867 In class, this is the time for exam questions. If you are watching the recording, send your question to your instructor before Tuesday. 146 00:32:40.867 --> 00:32:56.378 The last two exercises are bonus practice. The first one returns to Step 1. A customer in severe financial difficulty pays Bayfield Equipment a 5,000 dollar nonrefundable deposit on a 40,000 dollar machine. 147 00:32:56.378 --> 00:33:11.663 At the start, Bayfield concludes that collection of substantially all the expected consideration is not probable. Which account does Bayfield credit, and does it recognize revenue? What must it reassess? 148 00:33:11.663 --> 00:33:23.333 Then explain how the answer changes if credit quality falls only after a valid contract and a receivable exist. Stop the video and write your answer first. 149 00:33:33.333 --> 00:33:52.254 Bayfield debits Cash 5,000 dollars and credits Customer Deposit Liability 5,000 dollars. It recognizes no revenue. A nonrefundable label does not create a qualifying contract, and no performance has transferred. 150 00:33:52.254 --> 00:34:05.346 Bayfield keeps the liability until the contract qualifies or one of the limited conditions in ASC 606-10-25-7 is met. The later case is different. 151 00:34:05.346 --> 00:34:23.997 If credit quality falls after a valid contract and a receivable exist, Bayfield evaluates the receivable under Topic 326. It also reassesses whether the arrangement still qualifies after a significant change. 152 00:34:23.997 --> 00:34:26.867 Chapter 14 covers the allowance. 153 00:34:26.867 --> 00:34:39.457 The second bonus exercise returns to Step 5. Roscommon Bridgeworks has a 1,200,000 dollar bridge obligation that qualifies for over-time recognition. 154 00:34:39.457 --> 00:34:50.780 Costs faithfully show the transfer of control, and no cost needs to be excluded. Estimated total qualifying costs are 900,000 dollars. 155 00:34:50.780 --> 00:35:00.751 In Year 1, costs are 360,000 dollars, unconditional billings are 420,000 dollars, and collections are 390,000 dollars. 156 00:35:00.751 --> 00:35:13.933 Calculate progress, revenue, expense, gross profit, the receivable, and the contract asset or liability. Pause the video while you work through your answer. 157 00:35:25.933 --> 00:35:44.172 Progress is 360,000 over 900,000, or 40 percent. Revenue is 40 percent of 1,200,000 dollars, or 480,000 dollars. Expense is the 360,000 dollars of cost incurred, so gross profit is 120,000 dollars. 158 00:35:44.172 --> 00:36:01.577 The receivable is 420,000 dollars billed less 390,000 dollars collected, or 30,000 dollars. Revenue exceeds billings by 60,000 dollars, so Roscommon reports a 60,000 dollar contract asset. 159 00:36:01.577 --> 00:36:11.113 In a construction ledger, Construction in Progress holds 480,000 dollars of cost and recognized profit. 160 00:36:11.113 --> 00:36:22.500 The Billings on Construction account offsets it by 420,000 dollars, and the 60,000 dollar net amount is the contract asset. 161 00:36:22.500 --> 00:36:41.135 The next meeting is Exam 1, on Tuesday, September 29. Bring the permitted materials, and open Respondus before exam day. The Unit 2 review assignment is due Sunday, September 27, at 11:59 p.m. 162 00:36:41.135 --> 00:36:52.296 The Exam 1 practice form on the course site covers Units 1 and 2. Check the course site for any final announcement.